ATLAS v. UNITED STATES

December 23, 1982

RONALD ATLAS AND ELLEN ATLAS, PLAINTIFFS,v.UNITED STATES OF AMERICA, DEFENDANT.

The opinion of the court was delivered by: William T. Hart, District Judge.

MEMORANDUM OPINION AND ORDER

This is a civil tax refund action pursuant to
28 U.S.C. § 1346(a)(1). The matter is currently before the Court on the
United States' ("defendant") motion for partial summary
judgment. The plaintiff*fn1 Ronald Atlas ("Atlas") is one of
21 limited partners in an Illinois limited partnership, Fostman
Venture No. 4 ("Fostman 4"). Sometime in 1975, Fostman 4
became, in exchange for a capital contribution of $650,000.00,
a limited partner in an Oklahoma limited partnership Villa
Fontana Associates ("Villa Fontana"). Villa Fontana's sole
asset is a Tulsa apartment complex, Villa Fontana Apartments.
Pursuant to written agreement, 99 percent of Villa Fontana's
losses were to be allocated to Fostman 4 in 1975. Villa Fontana
claimed 1975 losses in the amount of $1,592,484.00. On his 1975
tax return, Atlas claimed $19,984.00 as his percentage share of
that loss. Most of Atlas' claim was disallowed by the Internal
Revenue Service.

The defendant argues that the primary reason*fn2 for the
disallowance to Atlas is that Fostman 4 did not become a
limited partner until December 30, 1975. It asserts that for
tax purposes a partnership is created only when capital and
services have been contributed with the intent to create a
partnership and where the requirements of state law have been
met. Neither capital nor services were contributed by Fostman
4 to Villa Fontana before December 30. Also several
prerequisites to closing the transaction, including
statutorily required filings, were not accomplished until that
day.

The defendant further states that the "varying interest"
rule provided for in section 706(c)(2) of the Internal Revenue
Code of 1954 (26 U.S.C.) ("Code")*fn3 prevents the
retroactive allocation of losses to persons not partners when
the losses occurred. In the alternative, the defendant claims
that the federal policy prohibiting the assignment of unearned
income or losses prevents Atlas from claiming more than his
percentage share of the losses incurred before December 30,
1975. Accordingly, the defendant requests the Court to
determine:

(1) That the partnership of Fostman Venture No.
4, for federal income tax purposes, was not
entitled to a retroactive allocation of 99% of
the net loss of the partnership of Villa Fontana
Associates for the period from January 1, 1975
until the date in 1975 on which Fostman Venture
No. 4 became a partner in Villa Fontana
Associates.

(2) That Fostman Venture No. 4 was not a
partner in Villa Fontana Associates prior to
December 30, 1975.

Atlas raises a number of arguments in opposition. First, he
claims that the 1975 tax laws permitted losses incurred from
the first day of the relevant tax year to be allocated to new
partners admitted up to and including the last day of the
partnership's tax year. Atlas alleges that he may claim,
pursuant to section 704(a) of the Code, whatever portion of
gain or loss is specified in the partnership agreement. Under
this view, the exact day in 1975 when Fostman 4 became a
limited partner in Villa Fontana is irrelevant. In the
alternative, Atlas claims that Fostman 4 became a limited
partner at least by December 1, 1975 and that he is entitled
to claim his distributive share of 100 percent*fn4 of the
losses suffered by Villa Fontana from December 1 until the end
of December, 1975.

Second, Atlas argues that the Court cannot grant summary
judgment on the issue of when Fostman 4 became a limited
partner in Villa Fontana because facts material to the
determination are in dispute. See Fed.R.Civ.P. 56(c). He says
that for purposes of federal taxation the creation of a
partnership is determined from the intent of the parties —
not, as the government says, from the contribution of capital
and services or from compliance with a state's partnership law.
Atlas also claims that when intent is at issue, summary
judgment is an improper remedy. See, e.g., Staren v. American
National Bank and Trust Co. of Chicago, 529 F.2d 1257 (7th Cir.
1976); Cedillo v. International Association of Bridge and
Structural Iron Workers, 603 F.2d 7 (7th Cir. 1979). Atlas
submits the affidavit of Jerald F. Richman, a general partner
of Fostman and Associates, indicating Richman's intent to
become a limited partner in Villa Fontana as of November 29,
1975 and to form Fostman 4 on the same day.

Finally, Atlas argues that partial summary Judgment is not
permitted where fewer than all parts of a single claim are
presented for disposition. Atlas claims that he is entitled to
either a share of 99 percent of all the losses incurred by
Villa Fontana in 1975 or 100 percent of the losses incurred
from December 1 through December 31, 1975. The defendant
allegedly seeks summary judgment only as to part of this claim
— whether retroactive allocation of 99 percent of the losses
is lawful irrespective of the date on which Fostman 4 became a
limited partner of Villa Fontana. Thus the portion of Atlas'
claim which proposes that he may deduct his share of 100
percent of the December 1975 losses allegedly has not been
presented for disposition.*fn5

On December 28, 1975, Atlas executed a Fostman 4
subscription agreement, having tendered an application to be
a limited partner six days before. On December 30, 1975, the
Agreement of Limited Partnership and Certificate for Fostman
4 were executed and filed in Illinois. Also on December 30,
Fostman 4 paid Villa Fontana the sum of $650,000.00. Finally,
on December 31, 1975, a Limited Partnership Agreement and
Certificate on behalf of Villa Fontana was filed in Oklahoma.

DISCUSSION

The Court first concludes that, as a matter of law, Fostman
4 did not become for federal tax purposes a limited partner in
Villa Fontana until December 30, 1975. For federal tax
purposes, the standards governing the existence of a
partnership are federal. Evans v. Commissioner, 447 F.2d 547
(7th Cir. 1971); Internal Revenue Code § 7701; Treasury
Regulations on Procedure § 301.7701-1. Thus, in one respect
Atlas is correct, i.e., whether the would-be partners complied
with the specificity of Oklahoma's or Illinois' partnership
laws by executing partnership agreements and certificates
before doing business is irrelevant to the determination of
when Fostman 4 was created for federal taxation.

Turning to the federal regulations, section 704(e)(1)
provides that "[a] person shall be recognized as a
partner . . . if he owns a capital interest in a partnership
in which capital is a material income producing factor."
Although section 704(e) applies to family partnerships, its
scope encompasses ...

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